Most debts get written off—discharged—in bankruptcy. The only ones that aren’t are specifically listed in the Bankruptcy Code.
Debts Covered by the Discharge
The basic rule is that all your debts get discharged in bankruptcy unless a particular debt fits a listed exception.
Focusing on Chapter 7 “straight bankruptcy,” you will likely receive an Order of Discharge within about 4 months of filing the case. The heart of this court order simply states that “A discharge… is granted to [the debtor].”
So what are the listed exceptions—what debts are NOT discharged through the Order of Discharge?
Exceptions to Discharge
Section 523 of the Bankruptcy Code covers “Exceptions to discharge.” There are two categories of exceptions:
debts which will still be discharged unless the creditor objects and prevails in that objection, and
debts which do not require objection by a creditor.
1) Debts Requiring Successful Creditor Objection
In this first category, “the debtor shall be discharged for [the] debt of a kind specified” “unless, on request of the creditor… , the [bankruptcy] court determines such debt to be excepted from discharge… .” Section 523(c)(1) of the Bankruptcy Code.
In other words, these kinds of debts DO get discharged unless ALL of the following are true:
the debt is “of a kind specified”
the creditor requests a court determination
the court determines in favor of the creditor that the debt should be “excepted from discharge”
There are 3 kinds of debts of this sort in which a creditor can ask for a court determination about discharge of the debt:
Fraud Debts: incurred when a debtor makes a misrepresentation or commits fraud to get a loan or credit. Section 523(a)(2).
Theft, Embezzlement, Fraud in a Trust Relationship: stealing from anyone, such as an employer or business partner, and especially from someone in a fiduciary relationship. 523(a)(4).
Willful and Malicious Injury: intentionally and maliciously harming a person or business, and/or property. 523(a)(6).
Timely and Successful Objection
How does a creditor ask for a court determination that a debt falls within one of these 3 kinds? It files a formal “adversary proceeding”—a type of limited lawsuit—in the bankruptcy court. It has to file this within a strict deadline—usually within 60 days after a scheduled meeting of creditors. If the creditor received appropriate notice of the bankruptcy case but doesn’t object by this deadline, the debt is discharged forever.
And if a creditor does timely object, how does the bankruptcy court decide whether a debt should get discharged? Unlike most lawsuits on a debt, the court does NOT need to determine whether the debtor owes the debt. THAT’s generally assumed. Rather the question is whether the facts support the narrow grounds of fraud and such which make the debt not dischargeable. If the creditor cannot prove the necessary facts, the debt will still be discharged.
2) Debts Not Requiring Creditor Objection
The kinds of debts that are discharged unless a creditor objects generally involve some bad action by a debtor towards the creditor. The general idea is that if a creditor cares about being wronged it will raise an objection to the discharge.
But in a second category of not-discharged debts the creditors do not need to object. That’s because the kinds of debts in this category are not dischargeable simply because of the nature of the debt. There doesn’t need to be a court determination. It’s usually quite straightforward whether or not the debt belongs to these nondischargeable types of debt.
Here’s a list of debts that don’t get discharged even without creditor objection:
Criminal fines, fees, and restitution
Income taxes, and other forms of taxes, under certain conditions
Child and spousal support
Student loans that don’t cause an “undue hardship”
Claims for bodily injury or death from driving while intoxicated
Debts not listed in your bankruptcy schedules, under certain conditions
There ARE occasionally questions about whether the debt at issue fits the not-discharged definition. But it’s usually clear whether a debt is, for example, a criminal fine or child support. Our next 6 blog posts will go through each of these types, focusing on situations where there may be some ambiguity.
Note: Today’s blog post was about the discharge of debts in a Chapter 7 case. The debts discharged in a Chapter 13 case are slightly broader. We’ll address the difference in an upcoming blog post.